Palantir touts its market lock-in

Barrier to entry remains one of the government market’s most challenging aspects, both for the customer in trying to figure out how high the barrier should be and the contractors aiming to scale that fence.

Albeit with a head-start through its In-Q-Tel roots, Palantir climbed the barrier and forced its way into areas once fenced off to the enterprise software company. See its book of business with the Army as a key example.

That also means Palantir has to deal with ongoing dysfunctions in the government market that stem from several factors including the current continuing resolution.

During Palantir’s fourth quarter earnings call Thursday, CEO Alex Karp told investors that an environment with no appropriations, such as the one now, still picks winners and losers.

On the losing end are “the people trying to enter the market,” Karp said. “The new startups (are) totally screwed."

Companies in the market but not holding crucial programs are only "partially screwed," according to Karp.

But those on the winning end are “the people that have software or products that are useful in the past, but have the right connections probably,” Karp added.

Palantir’s fourth quarter and year-end financial release represents the first time we have seen the company size up its U.S. government business since the company became publicly traded in 2020.

The public sector revenue number is $678 million, which represented nearly 44 percent of Palantir’s overall sales last year.

Denver-headquartered Palantir’s business and operating model must be taken into account when considering Karp’s summary of the current situation. His comments echo similar ones from other government contracting CEOs.

As Palantir explained in its filings to go public two years ago, the company is aiming to be the “default operating system for data across the U.S. government.”

Palantir is essentially telling agencies that its software products, which are acquired and then used on a subscription model, are the competition to what systems integrators have to offer.

Which means Palantir can lean on extensions and renewals to keep the revenue and cash flow going from its government customers.

Roughly one-third of that $678 million in U.S. government revenue last year came from customers who signed contracts with Palantir in 2017 or earlier, according to the company’s presentation for investors.

Customers signed in 2018 represented another roughly one-third of revenue in 2021. The remaining comes from contracts awarded in 2019 and afterward.

A similar reality in today’s market is holding true for IT and professional services companies, as some of their CEOs told investors at a conference hosted by investment bank Cowen last week.

But given many of them are in a growth model, their frustration with perceived stagnation across the GovCon ecosystem is at a different level.

Karp did say Palantir is finding the lumpy nature of U.S. government revenue something the company has to work around given it is in a growth model and pursuing certain larger awards to keep the expansion going.